This was never going to be good news and sure enough at the end of September 2016 a Policy and Supervisory statement was issued confirming these new rules.
The main area was around standardising the Interest Cover Ratios used by lenders along with other affordability tests applied to buy to lets including costs and personal taxation. How Portfolio and Experienced landlords were underwritten was also examined.
The New Rules
- All lenders will need to implement an Income Coverage Ratio Test using a rate if 5.5% and/ or an affordability test if personal income is considered to support such a loan. In plain English, this means that the rent must cover the mortgage payment not based on the actual rate of interest being charged, but at 5.5%.
- All firms will need to consider the likelihood of further interest rate rises over a minimum period of 5 years from the start of the buy to let
- In considering future interest rate rises, all firms will need to have regard to market expectations and a minimum increase of 2% in interest rates and any prevailing FPC recommendations. A firm will need to justify the basis of what is used in these considerations.
- If the considerations above would indicate the borrowers interest rate would be less than 5.5% during the first 5yrs of a borrowers buy to let mortgage, the lender should assume a minimum of 5.5%
- Portfolio Landlords will be classed as anyone owning 4 or more properties
- A specialist underwriting approach will be needed for these clients which should take a proportionate approach based on their knowledge of the borrower, their portfolio and alternative sources of income they have.
- Lenders will need to assess the borrowers experience, collect asset and liabilities of the borrower including any tax liabilities due to the new tax changes, consider the merits of any new lending in the context of the borrowers existing buy to let portfolio, their business plans and historical and future cash flows associated with their properties.
- Lenders need to put in place and operate with a full written policy detailing the differences between underwriting buy to let landlords and underwriting portfolio buy to let landlords
When are the changes coming in?
The new Interest Cover Ratios and Affordability tests (including considering a client’s personal taxation status) will be implemented by 1st January 2017.
All remaining expectations and rule changes will be implemented by 30th September 2017.
What does this mean for you?
It seems fairly obvious that potentially it will be harder for certain geographical areas and rental hot spots to achieve such affordability calculations in terms of rental yields using the new standardised 5.5% criteria.
In other words, you will get less mortgage for your rental income. This will make it harder to buy (as you will need more deposit) and harder to change mortgage - as you were originally assessed on a different set of rules that no longer apply.
This rule is likely to force loan to value levels downwards and potentially increase rents for tenants. Landlords are going to have to look at finding larger deposits or increase rents to cover the new requirements.
Lenders are going to spend more time processing portfolio landlords with extra checks on background properties needed so we may start to see niche Lenders championing these areas. Lenders will see that 5 year fixed rate products are a way of avoiding these more stringent affordability checks and enable them to gain market share so these products could become more popular and widely available than at present.
So yet again we are seeing more meddling in an area that was functioning pretty well.
YOUR PROPERTY IS AT RISK OF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE